Monirul Kazi is the founder and CEO of CLAVIS Fintech. ClAVIS offers Fintech solutions for emerging realities and ambitions.
Fueled by rising demand for accessibility of banking services in unconventional settings and technological breakthroughs, neobanks have emerged as game-changers.
Neobanks are evolving at a breakneck speed to level the financial field for the underbanked, with the global neobank market expected to surge from approximately $72 billion in 2022 to over $2.15 trillion by 2030.
In its infancy, “underbanked” was a label for people excluded from formal banking, often due to limited access, exorbitant fees or illiteracy.
Over time, it’s morphed into a nuanced term, encompassing those with documentation hurdles, geographical disadvantages, the uninterested and even individuals grappling with banking challenges like international payments.
Let’s examine how neobanks promise accessible, hassle-free solutions primed to democratize financial services for the underbanked.
Traditional Banks Vs. Neobanks
Neobanks are independently functioning digital banks distinct from traditional banks in several ways. Here are a few key differences:
• Operational Models: Traditional banks are burdened by the overhead costs of physical branches, including rent, staff and maintenance. Neobanks, operating exclusively online, significantly reduce these expenses and allocate resources toward customer-centric services, leading to a cost reduction of 60%-70%.
• Flexibility And Adaptability: Neobanks, thanks to their digital infrastructure and collaborations with other fintechs, quickly adapt to market trends and expand into new customer segments. Traditional banks, constrained by legacy systems, struggle to achieve such flexibility.
• Customer Onboarding And Engagement: Traditional banks often require a more extensive onboarding process involving paperwork, in-person verification or meetings with bank representatives. Neobanks, leveraging their digital platforms, offer instant account setups—often within minutes—with seamless KYC (know-your-customer) processes.
Their engagement tools, like instant notifications, budgeting tools and financial insights, provide customers with a more interactive banking experience.
• Data Utilization And Personalization: Neobanks often utilize cutting-edge technologies like AI and machine learning to analyze customer data and offer tailored financial products, insights and advice. This allows them to serve each customer’s unique needs better.
Traditional banks, while increasingly integrating these technologies for use cases like fraud detection and customer service, may not utilize them as extensively for personalization due to their larger size and diverse client base.
Neobanks For The Underbanked
The World Bank’s recent report reveals that about 1.4 billion people lack bank accounts due to reasons like insufficient funds, distance from financial institutions and lacking documentation. Neobanks offer tailored solutions for these underserved individuals.
• Rural Access: For those living in remote or rural areas, traditional banking often entails long and inconvenient journeys to city-based branches. Neobanks, with their digital-first approach, bring banking right to their fingertips, eradicating the need for physical visits and the challenges of paperwork.
• Affordability For Low-Income Individuals: Many working in urban environments face a constant battle against hidden fees from traditional banking systems. In contrast, neobanks provide no-frills accounts, minimal fees and offer microloan opportunities specifically designed for their financial realities.
• Building Trust: With a history riddled with stories of hidden charges and convoluted terms, many remain hesitant about banking. Neobanks counter this narrative by emphasizing transparent fee structures, user-centric interfaces and responsive customer support, cultivating trust and reliability.
• International Transaction Ease: Those engaged in international business or travel often grapple with the hassles of currency conversion and international transaction fees. Neobanks, with their global focus, streamline these processes, with many offering seamless multi-currency transactions and reducing associated costs.
• Tapping Into Emerging Markets: In rapidly digitizing economies, many find themselves at the crossroads of progress and traditional banking barriers. Neobanks bridge this gap by introducing digitized, locally relevant services that cater directly to these needs.
In the neobanking sector, it’s anticipated that by 2027, there will be around 376.90 million users worldwide. Despite the potential that neobanks offer, they need to overcome many challenges to be successful.
Challenges And The Way Forward
There are over 10,000 commercial banks worldwide, in contrast to a mere 276 neobanks (at the time of writing). With collaborative support from governments, tech companies and venture capitalists, these numbers are set to rise.
• Regulatory Hurdles: Obtaining a “digital banking license” is a convoluted journey for neobanks. Over the years, alternative fintech licensing in the forms of Money Service Business, E-Money Licenses and Open Banking Collaboration, etc., have helped fintechs come under financial regulatory coverage. They must navigate and collaborate with regtech (regulatory technology) companies to ensure compliance, KYC requirements, AML measures and advanced data security. Regulators must create a better supportive regulatory framework for financial technologies.
• Building Trust: Lack of physical presence leads to customer skepticism in those accustomed to traditional banking. Neobanks must establish trust through transparency, ethical practices and localized outreach programs for user education.
• International Transaction Complexities: Neobanks face challenges with high-volume international transactions, including pre-funding accounts and reliance on intermediary banks and payment hops.
Emerging alternatives like ARF in Switzerland—quickly convert money into cryptocurrency, send it directly to the recipient’s country, and change it back into regular money—making cross-border transactions more efficient for neobanks.
Neobanking Horizon: Potential, Profit And Partnership
In the evolving financial ecosystem, where traditional banks are also trying to serve the underbanked, neobanks shine across three pivotal axes: potential, profit and partnership.
• Potential: With giants like Revolut and Chime leading the way, neobanks are not just serving traditional markets but making a significant impact in areas with vast underbanked populations. The success stories from the Asia Pacific to Latin America and Africa highlight the transformative potential neobanks hold in democratizing finance.
• Profit: Beyond their noble goal of financial inclusivity, neobanks also present a lucrative opportunity. Their operational models—freed from traditional banking overheads—coupled with their appeal to a broad audience, promise significant profitability, attracting investors’ eyes and dollars.
• Partnership: The essence of neobanks’ growth strategy lies in forging strong partnerships. Collaborations with tech firms, alliances with other financial institutions and the backing of visionary investors are propelling their rapid scale and reach. Understanding the market, ensuring compliance and securing financial backing is pivotal.
Neobanks are sculpting the future of banking. It may be time to hop on the bandwagon.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.